Yahoo Grasping at Straws with Google Deal

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By Jason Simpkins
Associate Editor

Jerry Yang, Yahoo Inc.'s (YHOO) chief executive officer, finally got his wish last Thursday when his company partnered with rival Google Inc. (GOOG) to enhance its online advertisement business.

But while Yang insists the deal will generate an extra $800 million a year in revenue, shareholders and analysts alike are skeptical the company will be worth the $33 a share Microsoft Corp. (MSFT) was offering just months ago.

In accordance with the deal reached last week, ads from both Google and Yahoo will appear on Yahoo's search results. Yahoo has acknowledged that Google is more efficient in targeting online search audiences, estimating the larger search engine generates up to 70% more revenue per click for its ads. And it hopes that access to Google's AdSense technology will enhance its own targeting capabilities.

According to Yahoo, the deal could boost cash flow by $250 million to $450 million in the first 12 months of implementation.

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Google, on the other hand, will receive added revenue from having its ads posted on the country's No. 2 search engine.

"Clearly, it is time to move on, and we believe that this agreement with Google does so by strengthening our competitiveness," Yang said in a statement.

What Yang would like to move on from is a $44.6 billion failed takeover bid from Microsoft that would have netted Yahoo shareholders $33 a share.

Yahoo- which has suffered through eight straight quarters of declining profits- rejected Microsoft's offer Feb. 11, saying it substantially undervalued the company's worth. The original $31-per-share offer valued Yahoo at a 62% premium on Feb. 1.

After its second bid was rejected, a frustrated Microsoft turned its back and walked away. This infuriated Yahoo shareholders who had seen the bid as the company's last chance to regain profitability. A contingent led by Carl Icahn instigated a proxy battle, seeking to oust Yahoo's current board of directors and replace it with candidates of his choosing.

Icahn owned 10 million Yahoo shares and options to buy 49 million as of May 15, Bloomberg News reported. Investors BP Capital LLC Chairman T. Boone Pickens and hedge-fund manager John Paulson are reportedly backing his slate of nine directors, which includes himself and former Viacom Inc. (VIA) chief Frank Biondi Jr. The attempted coup has major ramifications for the Google deal in that it will be void should Icahn win the battle.

Also, if Microsoft- which Icahn has worked desperately to woo back into discussions- changes its mind and makes another off for the company, it will have to pay Google $250 million to end the partnership.

In addition to interference from activist investors, the deal will also have to clear regulatory hurdles as it couples the nations two largest search engines. Both companies have said the deal does not require regulatory approval, but that they would delay its implementation for up to three and a half months to give the U.S. Department of Justice a chance to review it.

"This collaboration between two technology giants and direct competitors for Internet advertising and search services raises important competition concerns," Sen. Herb Kohl (D-Wisc.), chairman of the Senate Antitrust Subcommittee, said in a statement. "The consequences for advertisers and consumers could be far-reaching and warrant careful review, and we plan to investigate the competitive and privacy implications of this deal further in the Antitrust Subcommittee."

Microsoft has said in the past that a deal between Yahoo and Google would consolidate more than 90% of the search ad market.

However, even if the deal goes through, Yahoo is basically relying on its biggest rival for growth. Both Merrill Lynch & Co. Inc. (MER) and Citigroup Inc. (C) have cut their estimates on Yahoo's stock price saying advertisers will likely shift more spending over to Google.

Yahoo's stock fell as low as $21.83 a share, Friday, down more than 7% from Thursday's close. Even if the deal lives up to Yang's billing, it seems unlikely the stock will reach the $33 a share Microsoft had offered any time in the near future.

"This [deal] just reaffirms the view that Yahoo, and particularly Jerry Yang and [cofounder] David Filo, blew it," Mark May, an analyst at Needham & Co. told Bloomberg. "It's going to be hard for Yahoo to come back from blowing what might be, looking back, the major milestone in Yahoo's corporate history."

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